What is Market Basket Worth?

Wednesday

Jul 30, 2014 at 6:00 AM

By Peter Cohan WALL & MAIN

Why do companies exist? Is it solely to enrich their owners or do workers and customers matter as well?In the U.S., the answer is that they’re all important, but when resources get scarce, shareholders and debt holders are the ones that matter most. In Germany, things are different – workers also have a seat on corporate boards.

That’s why all the workers going out on strike at Market Basket – the Tewskbury-based, 71-store, $4.6 billion (2013 revenues), 25,000-employee grocery chain -- won’t be enough to convince its board of directors to reinstate the former CEO, Arthur T. Demoulas. What will make the difference is whether the board – which paid out a $300 million special dividend to shareholders last fall -- accepts Arthur T. Demoulas’s offer to acquire the 50.5 percent stake that his cousin Arthur S. Demoulas’s side of the family now controls.

The board might accept an offer from outside or it might decide to reject all these offers and keep operating the company with Arthur S. Demoulas’s hand-picked pair of co-CEOs. If the latter happens, the next step could be to replace all the workers who are out on strike.

I think the best option would be to accept an offer from Arthur T. Demoulas – I estimate somewhere between $1.9 billion and $2.3 billion would do it – and he could then resume his role as CEO and put all his loyal workers back into the jobs they love so much.

Before getting into those details, I think a company should serve all of its stakeholders – that is, workers, employees, shareholders, and the community. My seventh book, "Value Leadership," argued that doing well by employees, customers and communities enriches shareholders over the long run.

This is particularly important in businesses where many of the employees have contact with customers. The grocery industry is a good example – cashiers, butchers, and all sorts of other people interact with customers. And if those employees know the business, develop relationships with customers, and convey a positive attitude about the company, those customers will keep coming back.

Moreover, even the employees who don’t have direct contact with customers – like the people who buy the goods that go on the shelves – will be more productive if they are happy and loyal. The reason is simple: they know the business very well, so they can do their jobs more effectively.

A closer look at Market Basket’s operations under Arthur T. Demoulas suggests that its industry-beating 7.2 percent operating margins in 2012, according to Boston Business Journal, derive from six key business tactics: long-term employee relationships, low overhead, bulk purchasing, low prices, no debt, and treating employees and customers like family.

The most important of these is long-term employee relationships. As Kevin Griffin, publisher of The Griffin Report explained to the Boston Globe, Market Basket has some employees at headquarters who have been there for 40 years. Market Basket accomplishes this by promoting from within – “once-grocery baggers ascend to senior positions” and paying people more than rivals do -- experienced cashiers earn more than $40,000, while full-time clerks start above the minimum wage at $12 an hour, four times a year bonuses of up to six to eight weeks more pay, and contributing 15 percent of each employee’s pay to a retirement plan worth $552 million in 2013 to which Market Basket contributed $43 million in 2012, according to Boston Business Journal.

The long-term employee loyalty boosts productivity. Compared to rivals, Market Basket had only six employees working as grocery buyers – one-fifth the number of grocery buyers as a similarly-sized chain. As Mr. Griffin explained, “By the time they’ve reached leadership positions, employees have been with the company long enough that they are deeply experienced across many levels of the company, meaning they’re able to operate more efficiently from a staffing perspective. The lack of turnover also cuts down on the costs of recruiting and training.”

Like many successful large retailers, Market Basket takes advantage of its size to negotiate volume discounts. All stores carry most of the same products and the company buys in large bulks because the low prices will mean that customers buy quickly and the store shelves will need to be replenished. Market Basket builds long-term relationships with suppliers who can deliver orders accurately and on time and charge a low price.

Speaking of low prices, Market Basket has a reputation for keeping its prices to consumers low – it sells butter for 35 percent less than Price Chopper does – and caring about customers. Nathan Mudhall emailed me the following on July 28: “As a shopper [at Market Basket] I always wondered how low margin products could vary so much in price from company to company. [Here is one example of non-sale prices:] Land O Lakes Butter at [Market Basket sells for] $3.79, Price Chopper $5.79, Shaw’s $5.29. There is no other market that is even close to them in price, selection, service, and cleanliness. They even make a point of getting my 96-year-old mother a shopping cart in the parking lot to use as a walker. This happens repeatedly. I'm amazed. Courtesy ... what a concept. At half the price of Wegmans.”

Moreover, unlike many grocery chains, Market Basket has no debt, which saves it from having to make monthly debt payments, and gives it room to earn a profit despite charging those lower prices.

There is also a direct emotional connection between Arthur T. Demoulas and his workers. One reason might be that he behaves as though each employee is a member of his family. Steve Paulenka, one of eight managers fired for participating in the protest, told the Globe about the interest he took in Mr. Paulenka’s “autistic son, Joe, after the boy broke two front teeth and needed reconstructive surgery.

For weeks after the accident, Mr. Demoulas would ask about the boy whenever he saw Mr. Paulenka. “Not, ‘Who is making payroll?’ but, ‘How’s Joe?’ ” Mr. Paulenka told the Globe.

This leads to the question that is probably on the minds of everyone with a stake in Market Basket: What would it take to get Arthur T. Demoulas back in charge?

The answer is complicated by a move he took in 2014 to lure in customers. According to The Salem News, Market Basket offered customers a 4 percent discount on their grocery bills – a move that ”could cut revenue by 3.75 percent and drop annual profit this year from about $240 million [in 2013] to $80 million [in 2014].”

This drop in profit likely assumed that Market Basket would be operating normally. However, the strikes over the last several weeks have reduced Market Basket revenues by an estimated 70 percent, according to the Globe.Nevertheless, on July 24, Mr. Griffin told the Globe that he estimated Market Basket’s entire business is valued between $3 billion and $3.5 billion. If that is accurate, I would guess that Arthur S. Demoulas’s side of the family would demand a 30 percent premium to compensate for giving up control.

This means that it would take between $3.9 billion and $4.6 billion to sell the entire company. And for Arthur T. Demoulas to return as CEO and continue to create value for Market Basket’s employees and customers, he will need to come up with between $1.9 billion and $2.3 billion to buy the 50.5 percent of the company he does not now control.

Unless he has that kind of cash lying around, he will probably have to finance that deal with debt – which would end up weakening the company – or by selling parts of his stake for cash.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.

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